Day 6: Ins and Outs of Insurance

This post is part of a series on Dave Ramsey’s Financial Peace University (FPU). The following is my impression of small pieces of the class. For more, I highly recommend taking the class for yourself.

Insurance is the one thing you buy and hope to never need. When (not if) you do need it, you are certainly glad you have it. The implications of not having insurance can be catastrophic. Its something none of us like to think about. If you don’t have homeowners insurance, you are out of luck if your house burns down. Even not having renter’s insurance can be disastrous, especially for a younger person just starting out (and more likely to be renting). If your apartment is subject to theft, a hurricane, earthquake, flood, tornado, or fire, it could take a year and thousands of dollars to replace all the furniture, appliances, clothes, computers, and pictures.

Performing the Impossible

Ramsey, in the 6th class of FPU, takes on the topic of insurance. Its bold, I must say. There is a ton to cover, but he does it all in about an hour, which means he doesn’t spend a lot of time going into much detail. Insurance is one of the most complex financial topics, but Ramsey saves us all from the complexity by simply going through each category of insurance and explaining what is needed and what isn’t. This session is certainly the most dry one we’ve sat through thus far, but I don’t blame Ramsey for that. It’s tough to make insurance exciting.

A Quick Rundown

The overarching theme running through the session is that insurance is there to protect against huge losses, while you and your emergency fund can cover the little setbacks. This leads Ramsey to opt for higher deductibles, in general. He starts with auto insurance. Ramsey believes that, with an adequate emergency fund, your auto insurance can have a high deductible to keep the premiums lower, and then you could also drop collision coverage on cars that are paid off or of less value.

Moving on to homeowner’s and renter’s insurance, Ramsey essentially cites the importance, as I did above, and also mentions that getting an umbrella policy is a good idea. Then he talks about health insurance, probably the biggest beast of them all to slay. After giving general guidelines, like not cutting corners on the out of pocket maximum, he only talks about one specific type of plan: Health Savings Accounts (HSA). He doesn’t talk about HMOs, PPOs, CDHPs, HDHPs, or the Affordable Care Act (ObamaCare). I’ll come back to this in a minute.

Ramsey also talks about disability insurance, long term care insurance, and identity theft protection, giving guidelines in each category for what to watch for, such as getting roughly 65% of your income in disability insurance, or making sure short term disability coverage lasts at least 5 years. You can keep costs down by covering your own short term losses with an emergency fund (like if you can’t work for a couple of months because you broke your leg).

Death – I Mean Life – Insurance

Ramsey is in the “buy term and invest the difference” camp. He gives an example from an actual quote for a $250,000 universal life policy and its projected cash value 20 and 40 years later. He compares that to spending the same amount of money ($178) on term insurance ($13) and investing the difference ($165). He shows how much more you end up with if you go with the term policy. Eventually, you become “self-insured,” meaning that you’ve built up enough assets that your death wouldn’t cause a financial loss.

Wrong on Health Insurance

Ramsey is wrong in his advice on health insurance. By this, I don’t mean I disagree with him. He’s factually inaccurate at worst and confused and unclear at best. He recommends a Health Savings Account (HSA) plan. He says about the HSA, “The way it works is this: very high deductible and then it pays 100%.” Because Ramsey doesn’t go into a lot of detail, its hard to know for sure how well he understands health insurance. The way he says it, it sounds like he is thinking the HSA is paying 100% of medical expenses, which would be inaccurate. The HSA is not a plan, its a savings account for medical costs. It is part of a High Deductible Health Plan (HDHP), and it is untrue that all of them pay 100% after the deductible. What is true, is that the HDHP has a true out-of-pocket max, unlike a lot of other types of plans. This may be what he is referring to.

Ramsey later says, “You’re allowed to save, up to your deductible, into a savings account every year called a health savings account.” This is also inaccurate. The limits on the HSA contributions are determined by the IRS, since they’re tax deductible, and have nothing to do with the size of your deductible in your specific plan.

Unhealthy on Health

Overall, Ramsey does a good job with this topic. Its a dry and very complex topic and there’s a ton of information to communicate. He does a good job of communicating the need for insurance and gives helpful guidelines for buying it. However, when it comes to health insurance, he needs to either brush up on the details or skip it altogether. He doesn’t give bad advice, it just seems, from the way he talks about it, that he doesn’t fully understand what he’s talking about. The rest of his advice does make sense and is coherent when fit into the rest of his plan.

-N&$

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